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Business & Finance
Business Accounting and Bookkeeping
Financial Statements

Explain Direct and indirect cost?


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February 27, 2016 1:32PM

A direct cost is a cost than can be attributed directly to a product; examples include materials used in production, electricity used by a machine making the product, worker hours spend operating the machine to make the product.

An indirect cost is a cost than occurs but cannot be attributed directly to a product; examples include electricity used by lighting, the account staff wages, business rates.

indirect costs, like direct costs can be both fixed and variable: business rates are fixed (for a year) but the cost of electricity used to light the factory floor is going to be variable depending upon how much the machines are used and staff being present - there can also be more than one product being made on the factory floor on different machines, but only one set of lights over the whole floor - one light could easily cover 2, 3 or more machines.